Intra-Law Firm Communications

Hypothetical: Your firm represents a long-time client in a business transaction. In the course of the representation, an associate working on the matter becomes concerned about the ethical propriety of some action taken by the partner in charge. She sends an e-mail to the firm's in-house ethics counsel, who conducts an internal investigation of the matter. The partner, associate and other employees of the firm are interviewed. Various notes and memoranda to file are prepared. Nothing is disclosed to the client. Eventually, the deal goes forward and is a catastrophic failure. The client sues the firm for malpractice and requests all of the firm's documents relating to the matter.

Question: Can the firm decline to produce the e-mails, notes and memoranda relating to its internal investigation on the grounds that the material is
protected by the firm's own attorney-client or work product privileges?

The answer is a definite 'maybe.'

The Intra-Firm Attorney-Client Privilege

In the seminal case of In re Sunrise Securities Litigation, 130 F.R.D. 560, 595 (E.D. Pa. 1989), the Federal Savings and Loan Insurance Corporation (FSLIC) and certain depositors sued the law firm that had represented the insolvent Sunrise Savings and Loan Association. The law firm declined to produce several documents reflecting internal consultations to the FSLIC, citing the firm's own attorney-client privilege. Reversing its own earlier ruling to the contrary, the Sunrise court agreed that a law firm has an attorney client privilege that it can assert in these circumstances, provided all the foundation requirements necessary for an assertion of the privilege are met. Id. at 595, 597. The court limited its holding, however, ruling that the privilege does not apply in circumstances in which the firm's representation of itself creates a conflict of interest with a current client of the firm. Id. at 597.

Following Sunrise, several other courts recognized the existence of an intra-firm privilege, without addressing the situation in which a law firm confers with its counsel about a current client of the firm. See, e.g., Hertzog, Calamari & Gleason v. The Prudential Ins. Co. of America, 850 F. Supp. 255 (S.D.N.Y. 1991); United States v. Rowe, 96 F.3d 1294 (9th Cir. 1996); Lama Holding Co. v. Shearman & Sterling, 1991 U.S. Dist. Lexis 7987 (S.D.N.Y. 1991).

In the Hertzog case, the court noted that 'it is well settled that the attorney-client privilege applies to communications between [a] corporation and its attorneys, whether corporate staff counsel or outside counsel,' as long as that counsel is not a 'participant in the underlying events.' Hertzog, 850 F. Supp. at 255. As a result, the court found that '[n]o principled reason appears for denying a comparable attorney-client privilege to a law partnership which elects to use a partner or associate as counsel of record in a litigated matter.' Id.

Both Sunrise and Hertzog involved communications that took place during the course of pending litigation against the firm. In United States v Rowe, the court extended the in-firm privilege to include internal investigations initiated prior to the commencement of litigation. Rowe, 96 F.3d at 1297.

More recently, the Restatement of the Law Governing Lawyers recognizes the existence of the intra-firm privilege:

A lawyer may refuse to disclose to the client certain law-firm documents reasonably intended only for internal review, such as a memorandum discussing which lawyers in the firm should be assigned to a case, whether a lawyer must withdraw because of the client's misconduct, or the firm's possible malpractice liability to the client.

Restatement Third, The Law Governing Lawyers, '46, Comment c. See also, '73, Comment c (law firm has a privilege, whether organized as a professional corporation, a partnership, a sole proprietorship or otherwise).

I am not aware of any reported decisions in Massachusetts, or the First Circuit, addressing the existence or scope of the intra-law firm privilege.

The 'Current-Client' Exception: Hard Cases Making Bad Law

For more than a decade after Sunrise, the reported decisions did not address the 'current client' exception (also known as the 'fiduciary' or 'conflict' exception) first mentioned in Sunrise. In a series of cases beginning in 2001, however, one court after another began to embrace it.

In two separate opinions in Nesse v. Shaw Pittman, 202 F.R.D. 344 (D.D.C. 2001) and 206 F.R.D. 325 (D.D.C. 2002), a federal magistrate acknowledged the existence of the in-firm privilege. But, citing Sunrise, he denied work product protection to a document created by the law firm based on the 'conflict-of-interest' exception. Nesse, 202 F. R. D. at 354-55. Two more decisions quickly followed, each denying a law firm's privilege claim on the basis of the 'current-client/conflict' exception. See, Bank Brussels Lambert v. Credit Lyonnais (Suisse), 220 F. Supp. 2d 283 (S.D.N.Y. 2002); and Koen Book Distributors v. Powell, Trachtman, Logan, Carrie, Bowman & Lombardo, P.C., 212 F.R.D. 283 (E.D. Pa. 2002).

The Bank Brussels case involved litigation related to a law firm's representation of its client in financing certain oil transactions. The law firm initially defended the client. While the underlying litigation was pending the client informed the law firm that, if the client were found liable, it would sue the firm for malpractice. At that point the head of the firm's Clients and Ethics Committee initiated an internal review of the firm's representation of the client, including a review of any potential conflicts and liability to the client. The client terminated the firm's representation a year later and, thereafter, filed suit against the firm.

In the course of the malpractice action, the client sought discovery of documents relating to the internal review, claiming that the documents were created in violation of the firm's fiduciary duty to the client. The firm argued that the documents were privileged, citing the Rowe and Hertzog opinions. The court found for the client, noting that '[i]t would seem inadvisable to expect in-house counsel to be shielded from a client's inquiries by attorney-client privilege in performing a conflict check when it is common knowledge that a conflict as to one attorney at a firm is a conflict as to all.' Bank Brussels, 220 F.Supp. at 287-88.

Similarly, in Koen, the court held that a law firm could not protect internal legal consultations about its client under either the attorney-client privilege or the work-product doctrine, due to a purported conflict-of-interest. There, the client warned the firm that it was considering bringing a legal malpractice action against it. The client continued to use the firm's services for another month before terminating the relationship. Upon learning of the client's threats, attorneys working with the client consulted with other attorneys in the firm about 'ethical and legal issues that had arisen out of the portent of a malpractice action.' Koen, 212 F.R.D. at 284. In the malpractice action, the client sought documents created in the course of those consultations.

The court rejected the firm's privilege claim on the ground that '[the documents] clearly establish that the law firm was in a conflict of interest relationship with its clients.' Id. at 286

A Badly Needed Course Correction

I believe the Nesse-Bank Brussels-Koen line of cases were poorly reasoned and wrongly decided. Even assuming the correctness of the underlying premise of the cases, i.e., that a lawyer who consults with inside ethics counsel with respect to a current client matter thereby creates a conflict of interest between the firm and its client, it does not necessarily follow that the firm has waived its own attorney-client privilege. It's when two clients with a common interest jointly hire a single attorney that the clients ordinarily lose the right to assert the privilege as against one another. See generally, Restatement Third, The Law Governing Lawyers, '75 and comment c. In our hypothetical situation, the firm's representation by its ethics partner is separate from the client's representation by the firm in its business transaction. Taken to its logical conclusion, the 'conflict of interest' exception could result in a finding of waiver even as to communications with a law firm's outside counsel, a strange result indeed.

A recent New York State Bar Association ethics opinion, moreover, rejects the notion that merely seeking internal advice about a current client matter creates an inherent conflict of interest. See, N.Y. State 789 (2005). The Ethics Committee found that the Code of Professional Responsibility provides support for an ethical infrastructure within a law firm, and that a firm 'is not only entitled, but required, to consider the ethical implications of what it does on a daily basis.' Id. at '12. 'Simply put, seeking advice on how best to accommodate a lawyer's multi-faceted obligations in service of one or more clients does not, without more,' create a conflict of interest under the Code. Id. at '16. The Committee noted, however, that in certain circumstances the firm may have an ethical obligation to disclose the results of its internal discussions to the client. Id. at '17.

Some Practical Tips

Given the unsettled state of the law in this area, law firms are well advised to proceed cautiously before conducting an internal investigation of the firm's work on a current client matter. Here are a few additional suggestions that may help the firm protect its internal communications:

• The firm should consider including language in its engagement letters asking its clients to acknowledge that, from time to time, the lawyers working on a matter may need to seek internal advice concerning their ethical and legal obligations and that such consultations do not waive the firm's intra-firm privilege.
• If your firm has not already done so, consider appointing a partner who is the 'go-to' person on these sorts of issues as the firm's general or ethics counsel. In particularly sensitive matters, outside counsel should conduct the investigation. In all events, the lawyer called on to conduct the investigation and advise the firm should not be one who is also working on the pending client matter.
• Under no circumstances should the time spent on an internal investigation be billed to a client matter or any resulting documents placed in the client's file ' where they literally become the client's property. It is shocking how often I have seen this occur.

It remains unclear whether, despite a firm's use of these recommended safeguards, a court will ultimately uphold the firm's claim of privilege. Therefore, the less put in writing the better, especially in the early stages of an internal investigation. Attorneys in the firm should especially be cautioned against using e-mail for these purposes.

Hypothetical: Your firm represents a long-time client in a business transaction. In the course of the representation, an associate working on the matter becomes concerned about the ethical propriety of some action taken by the partner in charge. She sends an e-mail to the firm's in-house ethics counsel, who conducts an internal investigation of the matter. The partner, associate and other employees of the firm are interviewed. Various notes and memoranda to file are prepared. Nothing is disclosed to the client. Eventually, the deal goes forward and is a catastrophic failure. The client sues the firm for malpractice and requests all of the firm's documents relating to the matter.

Question: Can the firm decline to produce the e-mails, notes and memoranda relating to its internal investigation on the grounds that the material is
protected by the firm's own attorney-client or work product privileges?

The answer is a definite 'maybe.'

The Intra-Firm Attorney-Client Privilege

In the seminal case of In re Sunrise Securities Litigation, 130 F.R.D. 560, 595 (E.D. Pa. 1989), the Federal Savings and Loan Insurance Corporation (FSLIC) and certain depositors sued the law firm that had represented the insolvent Sunrise Savings and Loan Association. The law firm declined to produce several documents reflecting internal consultations to the FSLIC, citing the firm's own attorney-client privilege. Reversing its own earlier ruling to the contrary, the Sunrise court agreed that a law firm has an attorney client privilege that it can assert in these circumstances, provided all the foundation requirements necessary for an assertion of the privilege are met. Id. at 595, 597. The court limited its holding, however, ruling that the privilege does not apply in circumstances in which the firm's representation of itself creates a conflict of interest with a current client of the firm. Id. at 597.

Following Sunrise, several other courts recognized the existence of an intra-firm privilege, without addressing the situation in which a law firm confers with its counsel about a current client of the firm. See , e.g. , Hertzog, Calamari & Gleason v. The Prudential Ins. Co. of America , 850 F. Supp. 255 (S.D.N.Y. 1991); United States v. Rowe , 96 F.3d 1294 (9th Cir. 1996); Lama Holding Co. v. Shearman & Sterling, 1991 U.S. Dist. Lexis 7987 (S.D.N.Y. 1991).

In the Hertzog case, the court noted that 'it is well settled that the attorney-client privilege applies to communications between [a] corporation and its attorneys, whether corporate staff counsel or outside counsel,' as long as that counsel is not a 'participant in the underlying events.' Hertzog, 850 F. Supp. at 255. As a result, the court found that '[n]o principled reason appears for denying a comparable attorney-client privilege to a law partnership which elects to use a partner or associate as counsel of record in a litigated matter.' Id.

Both Sunrise and Hertzog involved communications that took place during the course of pending litigation against the firm. In United States v Rowe, the court extended the in-firm privilege to include internal investigations initiated prior to the commencement of litigation. Rowe, 96 F.3d at 1297.

More recently, the Restatement of the Law Governing Lawyers recognizes the existence of the intra-firm privilege:

A lawyer may refuse to disclose to the client certain law-firm documents reasonably intended only for internal review, such as a memorandum discussing which lawyers in the firm should be assigned to a case, whether a lawyer must withdraw because of the client's misconduct, or the firm's possible malpractice liability to the client.

Restatement Third, The Law Governing Lawyers, '46, Comment c. See also, '73, Comment c (law firm has a privilege, whether organized as a professional corporation, a partnership, a sole proprietorship or otherwise).

I am not aware of any reported decisions in Massachusetts, or the First Circuit, addressing the existence or scope of the intra-law firm privilege.

The 'Current-Client' Exception: Hard Cases Making Bad Law

For more than a decade after Sunrise, the reported decisions did not address the 'current client' exception (also known as the 'fiduciary' or 'conflict' exception) first mentioned in Sunrise. In a series of cases beginning in 2001, however, one court after another began to embrace it.

In two separate opinions in Nesse v. Shaw Pittman , 202 F.R.D. 344 (D.D.C. 2001) and 206 F.R.D. 325 (D.D.C. 2002), a federal magistrate acknowledged the existence of the in-firm privilege. But, citing Sunrise, he denied work product protection to a document created by the law firm based on the 'conflict-of-interest' exception. Nesse, 202 F. R. D. at 354-55. Two more decisions quickly followed, each denying a law firm's privilege claim on the basis of the 'current-client/conflict' exception. See, Bank Brussels Lambert v. Credit Lyonnais (Suisse) , 220 F. Supp. 2d 283 (S.D.N.Y. 2002); and Koen Book Distributors v. Powell, Trachtman, Logan, Carrie, Bowman & Lombardo, P.C., 212 F.R.D. 283 (E.D. Pa. 2002).

The Bank Brussels case involved litigation related to a law firm's representation of its client in financing certain oil transactions. The law firm initially defended the client. While the underlying litigation was pending the client informed the law firm that, if the client were found liable, it would sue the firm for malpractice. At that point the head of the firm's Clients and Ethics Committee initiated an internal review of the firm's representation of the client, including a review of any potential conflicts and liability to the client. The client terminated the firm's representation a year later and, thereafter, filed suit against the firm.

In the course of the malpractice action, the client sought discovery of documents relating to the internal review, claiming that the documents were created in violation of the firm's fiduciary duty to the client. The firm argued that the documents were privileged, citing the Rowe and Hertzog opinions. The court found for the client, noting that '[i]t would seem inadvisable to expect in-house counsel to be shielded from a client's inquiries by attorney-client privilege in performing a conflict check when it is common knowledge that a conflict as to one attorney at a firm is a conflict as to all.' Bank Brussels, 220 F.Supp. at 287-88.

Similarly, in Koen, the court held that a law firm could not protect internal legal consultations about its client under either the attorney-client privilege or the work-product doctrine, due to a purported conflict-of-interest. There, the client warned the firm that it was considering bringing a legal malpractice action against it. The client continued to use the firm's services for another month before terminating the relationship. Upon learning of the client's threats, attorneys working with the client consulted with other attorneys in the firm about 'ethical and legal issues that had arisen out of the portent of a malpractice action.' Koen, 212 F.R.D. at 284. In the malpractice action, the client sought documents created in the course of those consultations.

The court rejected the firm's privilege claim on the ground that '[the documents] clearly establish that the law firm was in a conflict of interest relationship with its clients.' Id. at 286

A Badly Needed Course Correction

I believe the Nesse-Bank Brussels-Koen line of cases were poorly reasoned and wrongly decided. Even assuming the correctness of the underlying premise of the cases, i.e., that a lawyer who consults with inside ethics counsel with respect to a current client matter thereby creates a conflict of interest between the firm and its client, it does not necessarily follow that the firm has waived its own attorney-client privilege. It's when two clients with a common interest jointly hire a single attorney that the clients ordinarily lose the right to assert the privilege as against one another. See generally, Restatement Third, The Law Governing Lawyers, '75 and comment c. In our hypothetical situation, the firm's representation by its ethics partner is separate from the client's representation by the firm in its business transaction. Taken to its logical conclusion, the 'conflict of interest' exception could result in a finding of waiver even as to communications with a law firm's outside counsel, a strange result indeed.

A recent New York State Bar Association ethics opinion, moreover, rejects the notion that merely seeking internal advice about a current client matter creates an inherent conflict of interest. See, N.Y. State 789 (2005). The Ethics Committee found that the Code of Professional Responsibility provides support for an ethical infrastructure within a law firm, and that a firm 'is not only entitled, but required, to consider the ethical implications of what it does on a daily basis.' Id. at '12. 'Simply put, seeking advice on how best to accommodate a lawyer's multi-faceted obligations in service of one or more clients does not, without more,' create a conflict of interest under the Code. Id. at '16. The Committee noted, however, that in certain circumstances the firm may have an ethical obligation to disclose the results of its internal discussions to the client. Id. at '17.

Some Practical Tips

Given the unsettled state of the law in this area, law firms are well advised to proceed cautiously before conducting an internal investigation of the firm's work on a current client matter. Here are a few additional suggestions that may help the firm protect its internal communications:

• The firm should consider including language in its engagement letters asking its clients to acknowledge that, from time to time, the lawyers working on a matter may need to seek internal advice concerning their ethical and legal obligations and that such consultations do not waive the firm's intra-firm privilege.
• If your firm has not already done so, consider appointing a partner who is the 'go-to' person on these sorts of issues as the firm's general or ethics counsel. In particularly sensitive matters, outside counsel should conduct the investigation. In all events, the lawyer called on to conduct the investigation and advise the firm should not be one who is also working on the pending client matter.
• Under no circumstances should the time spent on an internal investigation be billed to a client matter or any resulting documents placed in the client's file ' where they literally become the client's property. It is shocking how often I have seen this occur.

It remains unclear whether, despite a firm's use of these recommended safeguards, a court will ultimately uphold the firm's claim of privilege. Therefore, the less put in writing the better, especially in the early stages of an internal investigation. Attorneys in the firm should especially be cautioned against using e-mail for these purposes.